UNIT – 3

MONEY MARKET
AND CAPITAL
MARKET
MONEY MARKET
 INTODUCTION
• There are two types of financial markets viz.,
the money market and the capital market.
• The money market in that part of a financial
market which deals in the borrowing and
lending of short term loans generally for a
period of less than or equal to 365 days.
• It is a mechanism to clear short term
monetary transactions in an economy.
 DEFINITION
• According to Crowther, "The money market is a name
given to the various firms and institutions that deal in
the various grades of near money."
• According to the RBI, "The money market is the centre
for dealing mainly of short character, in monetary
assets; it meets the short term requirements of
borrowers and provides liquidity or cash to the lenders.
It is a place where short term surplus investible funds
at the disposal of financial and other institutions and
individuals are bid by borrowers, again comprising
institutions and individuals and also by the
government."
 FUNCTIONS OF MM
To maintain monetary equilibrium

To promote economic growth

To provide help to Trade and Industry.

To help in implementing Monetary Policy

To help in Capital Formation

Money market provides non-inflationary

sources of finance to government
 The major functions of money market are given below:-
• To maintain monetary equilibrium. It means to keep a balance between
the demand for and supply of money for short term monetary
transactions.
• To promote economic growth. Money market can do this by making funds
available to various units in the economy such as agriculture, small scale
industries, etc.
• To provide help to Trade and Industry. Money market provides adequate
finance to trade and industry. Similarly it also provides facility of
discounting bills of exchange for trade and industry.
• To help in implementing Monetary Policy. It provides a mechanism for an
effective implementation of the monetary policy.
• To help in Capital Formation. Money market makes available investment
avenues for short term period. It helps in generating savings and
investments in the economy.
• Money market provides non-inflationary sources of finance to
government. It is possible by issuing treasury bills in order to raise short
loans. However this dose not leads to increases in the prices.
 CHARACTERISTICS OF MM
• In this market the short terms funds are
borrowed and lent.
• In this market the parties mutually agree on the
terms & conditions of the exchange of funds.
• The interest rate is determined on the basis of
demand and supply of money.
• The fund suppliers in the market are commercial
banks and financial institutions.
• The borrowers in this markets are government,
commercial banks, manufacturing concerns and
firms.
MONEY MARKET INSTRUMENTS
 CALL MONEY OR CALL LOAN
• Call money is short-term finance repayable on
demand, with a maturity period of one to fifteen
days, used for inter-bank transactions.
• The money that is lent for one day in this market
is known as "call money" and, if it exceeds one
day, is referred to as "notice money."
• Commercial banks have to maintain a minimum
cash balance known as the cash reserve ratio.
The Reserve Bank of India changes the cash ratio
from time to time.
 CONT’D…
• Banks also work with call loans, issuing call
loans to other banks as needed to increase
liquidity.
• Bank A might, for example, take out a call loan
from Bank B to ensure that it can cover the
payroll checks which it knows will be coming
in. Many banks issue call loans for 24 hours
and sometimes even less, moving huge sums
of money around in the process.
 CONT’D…
• Usually, when a lender decides to call a loan, it
gives the borrower some warning. Brokerage
houses, for example, will call clients in the
morning to inform them that their loans will be
called, so that they have a chance to organize
funds to cover the loan. A call loan may go for
days, weeks, or even months without being called
if the lender feels comfortable, since interest will
be racking up all the while, but borrowers should
not depend on prolonged inaction when it comes
to a call loan.
 DEFINITION

A call loan is a loan that

the lender may force the
borrower to repay at any time.
 T-BILLS
• A Treasury Bill, or T-Bill, is short-term debt issued
and backed by the full faith and credit of the
United States government.
• These debt obligations are issued in maturities of
4, 13 and 26 weeks
• The T-bills are issued by the RBI on behalf of the
central govt. at a discount.
• T-Bills are issued at a discount to
the maturity value.
• For example, a 26-week T-bill is priced at $9,800
on issuance to pay $10,000 in six months. No
interest payments are made
 Cont’d…
• T-bills are considered the safest
possible investment and provide what is
referred to as a "risk-free rate of return,"
• T-bills are very short-term investments, there
is very little interest rate risk.
 CERTIFICATE OF DEPOSITS
• Certificates of Deposit (CDs) were introduced in India
in 1989.
• Certificate of Deposit is like a promissory note issued
by a bank in form of a certificate entitling the bearer
to receive interest.
• It is similar to bank term deposit account.
• The certificate bears the maturity date, fixed rate of
interest and the value.
• The returns on certificate of deposits are higher than
T-Bills because they carry higher level of risk.
 CONT’D…
• Scheduled commercial banks excluding Regional Rural Banks
(RRBs) and Local Area Banks (LABs) Select all-India Financial
Institutions that have been permitted by RBI to raise short-
term resources within the umbrella limit fixed by RBI.
• Minimum amount of a CD should be Rs.1 lakh, i.e., the
minimum deposit that could be accepted from a single
subscriber should not be less than Rs.1 lakh and in the
multiples of Rs. 1 lakh there after. INVESTORS CDs can be
issued to individuals, corporations, companies, trusts, funds,
associations, etc.
• The maturity period of CDs issued by banks should be not less
than 7 days and not more than one year. The FIs can issue CDs
for a period not less than 1 year and not exceeding 3 years
from the date of issue.
 COMMERCIAL PAPER
• Commercial Paper is the short term unsecured promissory
note issued by corporate and financial institutions at a
discounted value on face value.
• It was introduced in India in 1990 with a view to enabling
highly rated corporate borrowers/ to diversify their sources of
short-term borrowings and to provide an additional
instrument to investors.
• They come with fixed maturity period ranging from 1 day to
270 days.
• These are issued for the purpose of financing of accounts
receivables, inventories and meeting short term liabilities.
• The return on commercial papers is higher as compared to T-
Bills so as the risk as they are less secure in comparison to
these bills.
• It is easy to find buyers for the firms with high credit ratings.
These securities are actively traded in secondary market.
REPURCHASE AGREEMENTS (REPO)
• Repurchase Agreements which are also called as Repo or
Reverse Repo are short term loans that buyers and sellers
agree upon for selling and repurchasing.
• Repo or Reverse Repo transactions can be done only between
the parties approved by RBI
• RBI allowed only between RBI-approved securities such as
state and central government securities, T-Bills, PSU bonds
and corporate bonds.
• They are usually used for overnight borrowing.
• Repurchase agreements are sold by sellers with a promise of
purchasing them back at a given price and on a given date in
future.
 BANKER’S ACCEPTANCE
• Banker's Acceptance is like a short term investment plan
created by non-financial firm, backed by a guarantee from the
bank.
• It's like a bill of exchange stating a buyer's promise to pay to
the seller a certain specified amount at a certain date.
• And, the bank guarantees that the buyer will pay the seller at
a future date.
• Firm with strong credit rating can draw such bill.
• These securities come with the maturities between 30 and
180 days and the most common term for these instruments is
90 days.
• Companies use these negotiable time drafts to finance
imports, exports and other trade.
 PROGRESS OF MONEY MARKET
Ref IFS book, pg- 326, author Aditi Abhyankar, pub-Himalya.

• Monetary policy decision are transmitted to the

whole economy through changes in financial
prices and financial quantities.
• All over the world, the interest rate channel is the
key channel of monetary policy transmission.
• The management of liquidity was essentially
done by RBI through direct instruments.
• After 1991, LPG regime, the interest rates are
largely market determined.
 Cont’d…
• The RBI influences the monetary conditions
through market based indirect
instruments.(Repo and reverse repo).
• The other instruments such as standing
facilities provide limited liquidity to eligible
market participants.
• All well developed money market are also
integrated with other segments of financial
markets such as govt. securities , forex etc.
 ROLE OF RBI
Ref FM vipuls, P.K Bandgar (4th sem BI)

• ISSUE OF CURRENCY NOTES

• BANKER TO THE GOVT.
• BANKERS BANK
• EXCHANGE CONTROL AUTHORITY
• CREDIT CONTROL
• SUPERVISING AUTHORITY.
• AGRICULTURAL FINANCE
 IMPORTANCE OF MONEY MARKET IN
INDIAN ECONOMY
• Financing trade and industry
• Profitable venture
• Help to central bank
• Help to govt.
• Capital formation.
ref IFS book Dr. G. Ramesh Babu, pub-himalaya, pg-139
CALL MONEY
MARKET
 INTRODUCTION
ref vipuls FM book pg-87-88
• The call money market exists in almost all
developed money markets.
• The nature of this market is different in
different countries apart from one feature i.e
dealing in short term securities.
• Indian economy has well developed money
market, it comprises of RBI, commercial
banks, foreign banks, cooperative banks,
finance corporations and DHFL.
 MEANING AND FUNCTIONS
• It’s a part of money market.
• Day to day surplus funds are traded by the
banks.
• Trading done in short term funds.
• Maturity period is between 1 – 15 days.
• Loans are repayable on demands.
• It was operationalized in india with the
inauguration of the RBI in 1935
 CALL RATE
The interest rate applied to interbank loans, or
loans between financial institutions,
on money not deposited for a fixed period of
time. Changes to this rate have a large impact
on interest rates for corporate and consumer
loans, and also affect the amount of liquidity
available to the market.
 IMPORTANCE (vipuls FM pg-90)
• Fulfills sudden demand for funds
• Improves the liquidity position of a firm
• It deals in short term assets
• In India it doesn’t satisfy the criteria of
developed money market.
• RBI more focus on commercial banks.
COMMERCIAL
BILL
MARKET
 INTRODUCTION
• Purchase and discounting of bills of exchange
is another way of employing bank funds.
• Bank provides WC to companies through cash
credits, over drafts, and purchase or
discounting of commercial bills.
• Bills of Exchange & Promissory notes are
negotiable instruments which enable the
debtors to discharge their obligations towards
their creditors.
• It’s a money market short term instrument.
 BILL OF EXCHANGE
• It widely used in the discharge of business
obligations.
• It is generally drawn by a creditor on his
debtor and it is presented to the debtor for his
acceptance.
• The debtor is known as Acceptor or Drawee,
who commits himself to make payment on the
due date.
 Definition
• The Negotiable Instruments Act, 1881 defines
a bill of exchange as “ a written Instrument,
containing an unconditional order, signed by
the maker, directing a certain person, to pay a
certain sum of money only, to or to the order
of a certain person or to the bearer of the
instrument.”
KINDS OF BILLS OF EXCHANGE (vipul fm
pg 105)

• Time & Demand Bills.

• Trade Bill & Accommodation Bill
• Clean & Documentary Bill
• Inland & Foreign Bills
Thank
you